Turkey’s purge of coup supporters shifted into high gear last week after President Recep Tayyip Erdogan declared a three-month state of emergency. This included, among other things, shutting down more than 1,000 private schools, 1,200 charities and 15 universities.
Amid the purge, Turkey saw its credit rating slip two steps below investment grade as one of the world’s leading credit rating agencies warned of growing political instability in the West Asian country.
S&P Global Ratings, one of the world’s “Big Three” credit rating agencies, lowered Turkey’s sovereign debt rating one level to BB.
The “polarization of Turkey’s political landscape has actually further eroded its institutional checks and balances,” which could see capital inflows all but dry up, S&P wrote in a statement last week.
“Turkey’s economic, fiscal, and debt metrics could deteriorate beyond what we expect, if political uncertainty contributed to further weakening in the investment environment, potentially intensifying balance-of-payment pressures,” the rating agency wrote.
The latest political upheaval could tarnish Turkey’s otherwise stable growth outlook. The Worldwide Monetary Fund (IMF) announced back in April that the Turkish economy was on pace to expand 3.8% this year, pending any unforeseen shocks.
“Growth remains based on domestic demand, in turn, supported by accommodative monetary and fiscal policies,” the Worldwide lending institution said in its annual report on Turkey.
Just three months later, Turkey finds itself going down a dangerous road of political uncertainty and increasing authoritarianism. Experts fear that Erdogan’s quest to amend the constitution to give him more powers could pull the plug on foreign capital flows into the republic.
The global financial markets appear to have actually moved past Turkey’s failed coup attempt, at least for the time being. Investors are increasingly fixated on central bank policy, corporate earnings and economic data.
Turkish stocks have actually also rebounded in the early part of the week after plunging in the wake of the attempted putsch. According to Bloomberg News, the country’s stock market outperformed all other global equity markets. The Turkish lira, fresh off its biggest decline in eight years, also rebounded sharply.
The latest rally in Turkish stocks suggests investors were keen on bargain hunting. The Borsa Istanbul 100 Index spiked 3.4% in the first trading session of the week, with 97 stocks recording gains.
The outlook on Turkish finances remains intricately tied to the conclusion of the three-month state of emergency. Investors will be looking for signs of stability, including clear checks and balances on the Erdogan regime. These factors will likely play a big role in how the country is perceived by foreign investors and the European Union (EU).
 Russia Today (July 24, 2016). “Erdogan shut 1,000+ private schools, 1,200+ charities, 15 universities.”
 Gabrielle Coppola (July 20, 2016). “S&P Cuts Turkey Credit Rating, Citing Political Uncertainty.” Bloomberg.
 Tugce Ozsoy (July 15, 2016). “Turkey Stocks Rise Most in World as Lira Beats Emerging Peers.” Bloomberg.
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